Ten Key Provisions for Independent Contractor Agreements – Part 3 of our Updating

Briefly skipping over the important intellectual property ramifications of utilizing independent contractors rather than employees, I wanted to quickly review some of the important deal terms for independent contractor agreements, which are also available on a fully searchable basis at www.RealDealDocs.com.  I’ve also provided links to some recent independent contractor agreements filed by some public companies, such as this independent contractor agreement from an environmental consulting and technology provider based in Canada in addition to the ones found at the sites above.

It is generally good drafting to include the following terms in independent contractor agreements, particularly if your objective is to preserve independent contractor status rather than an employee relationship:

1.   Who the parties are and what is their intended relationship (i.e., independent contractor status)

2.   The services to be provided

3.   Compensation, the nature and timing of which contributes to the determination of independent contractor status

4.   Reimbursement of expenses

5.   Company’s cooperation obligations

6.   An affirmative representation of independent contractor’s understanding of tax obligations

7.   Ownership of work product, with particular attention to the assignment of intellectual property rights, which under statutory law in the US are automatically held by the independent contractor unless specifically assigned to the Company

8.   Confidentiality / non-disclosure and non-solicitation of employees or customers

9.   Termination provisions (the easier the independent contractor can terminate without penalty, generally the more likely an employee relationship is found)

10.   General provisions, including warranties, governing law provisions, arbitration, notices, survival, severability, assignability, indemnification, etc.

I should also mention that you can search here for specific deal clauses and provisions from independent contractor agreements, or from any other type of agreement for that matter.

Determining Independent Contractor vs. Employee Status – Part 2 of Updating our Independent Contractor Agreements

As I mentioned in a previous post on how we are updating our independent contractor agreements, one of the critical determinants is to figure out whether someone is an employee or an independent contractor.  This is important because it determines a Company’s liability to pay and withhold Federal income tax, social security, Medicare, and Federal unemployment tax, as well as potential liability for state based taxes.

Essentially, the tests to determine whether someone is an employee or an independent contractor come down to an issue of control – the more control the Company exerts over the individual, particularly with regard to how the work gets done and how autonomous the individual is in calling its own shots, the more likely the relationship is going to be seen as an independent contractor relationship.

The IRS breaks these elements of control down into three categories in this helpful guide:

1. “Behavioral Control – Facts that show whether the business has a right to direct and control the individual.”  These factors include the specificity of instructions and training.
2. “Financial Control – Facts that show whether the business has a right to control the business aspects of the worker’s job.”  To me, these factors go to how financially independent the individual is in terms of its ability to operate its business of providing services to the Company.
3. “Type of Relationship – Facts that show the type of relationship,” which include such factors as how long the relationship is intended to last, the written intention of the parties, etc.

In addition to the criteria proposed by the IRS, there are a number of common law criteria used in determining an individual service provider’s status with regard to employment, and individual states have their own guidelines for determining an individual’s status.  For example, see California’s guidelines here.

I’ll discuss some very important issues around intellectual propery ownership for independent contractor relationships in a subsequent post.